United States: Less regulation and no change for NAFTA

Macro Highlights
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2/8/2017

The US president has signed an executive order requiring federal agencies to scrap two existing regulations for every new regulation issued, in an effort to cut costs and red tape. The outlook for international trade is still uncertain, even though hard-line protectionism in the United States would have damaging multilateral consequences that Mr Trump cannot ignore.

Donald Trump focussed on three main topics during his campaign: fiscal stimulus, international trade and deregulation. The first topic has hardly been mentioned since the election, but the other two have been the subject of several statements.

In terms of deregulation, Mr Trump signed an executive order on 30 January requiring federal agencies to scrap two existing regulations for each new regulation issued. In this way, the new president hopes to cut the cost of red tape. The Office of Management and Budget (OMB)[1] put total regulatory costs for the period from 2006 to 2015 at an average of around USD 720 per employee, or 0.7% of US GDP. However, these figures should be taken with a pinch of salt, as the OMB only looked at 130 major regulations from among the 36,289 issued by federal agencies during the same period.

Concerning international trade, Mr Trump has signed an order to withdraw the United States from the Trans-Pacific Partnership (TPP), cutting short any chances of it being ratified by Congress. In addition, the Mexican president announced a 90-day consultation process on the future of the North American Free Trade Agreement (NAFTA). This was in response to Trump's numerous statements about withdrawing the United States from NAFTA and applying a 20% tariff on goods imported from Mexico. Any NAFTA member can trigger Article 2205 and withdraw from the agreement six months after providing written notice to the other parties. In the United States, NAFTA is not technically a treaty as it is in Mexico – it is an executive agreement, which means congressional approval is not required to withdraw from it. If the United States did this, trade between the United States and Mexico would be governed by World Trade Organization (WTO) rules under the “most favoured nation” principle. This non-discriminatory principle stipulates that a country cannot apply higher import tariffs to one WTO member than it does to other members. Goods imported from Mexico would therefore go from being taxed at a rate of practically 0% under NAFTA to no more than 3.5% under WTO rules. This really puts into perspective Trump's proposed tariff of 20% – or even 35% during his campaign. If the United States went ahead and levied these high tariffs anyway, it would be violating the “most favoured nation” principle, and Mexico would be entitled to apply offsetting measures to repair the damage caused.

There are still numerous uncertainties surrounding international trade. Mr Trump could even go so far as to leave the WTO in order to have the freedom to increase tariffs on imported goods. In that case, the United States’ trading partners would probably respond by raising their customs tariffs on goods imported from the United States. Rather than withdrawing from the WTO, Mr Trump could also use the Trade Expansion Act of 1962 or the Trade Act of 1974 to impose protectionist measures on goods imported to the United States. However, it's worth remembering that US-Mexico trade relations are particularly complex, as illustrated by the tangled supply chains of many multinationals. This, together with potential retaliatory measures by the United States’ trading partners, means that there are limits to how hard of a protectionist line the country can take.

On the domestic front, 227,000 jobs were added to the US economy in January, and the labour-force participation rate ticked up to 62.9%. Unemployment rose by 0.1 percentage point to 4.8%, and hourly wages grew at a moderate annual rate of 2.5%. This will allow the Federal Reserve to tighten monetary policy at an unhurried pace.

[1] OMB, 2016 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act

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